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Dennis Kozlowski Indicted On Sales Tax Fraud Charges

by Mike Godfrey, Tax-News.com, New York

06 June 2002

Former Tyco International Ltd Chief Executive L. Dennis Kozlowski, who resigned from the company on Monday amid rumours that he was being investigated for sales tax fraud, was indicted Tuesday on charges that he conspired with art galleries and consultants to evade paying more than $1 million in sales taxes on artwork, including paintings by Monet and Renoir.

Prosecutors said that empty boxes were shipped to Tyco's headquarters in Exeter, New Hampshire (Tyco is based in Bermuda, but operates out of Exeter) to make it seem as though the paintings, worth at least $13m were being shipped there instead of Mr. Kozlowski's Fifth Avenue apartment in Manhattan, thus avoiding the need to to pay the 8.25% New York combined city and state sales tax.

55-year old Mr. Kozlowski, pleaded not guilty at a brief court hearing in New York, and was freed pending trial after posting a $3 million bond. The indictment includes 11 felonies, each punishable by up to four years in prison.

Mr. Kozlowski's lawyer, Stephen Kaufman, said the charges are just allegations at this stage: "When all of the facts are carefully and fully presented, a court or jury may find them lacking in substance."

Investigators claim that some of the funds Mr. Kozlowski used to purchase the paintings were borrowed from Tyco through an executive loan program that was supposed to help top employees pay taxes due on stock options. If true, this would raise questions about the legality of such borrowing. A Tyco spokesman said he wasn't aware of any borrowings by Mr. Kozlowski to buy artwork.

82-year-old District Attorney Robert Morgenthau said that the probe into Mr Kozlowski began when the New York State Banking Department gave his office information on certain financial transactions "that looked like money laundering." The investigation began to focus on Mr Kozlowski when it was found that that Tyco corporate money was being transferred into Mr. Kozlowski's personal accounts, Mr. Morgenthau said.

Tyco stock rose 72 cents, or 4.5%, on Tuesday to close at $16.77, having fallen 27% on Monday when news of the investigation broke. The shares are down from a high of more than $60 last year.

It's thought that evasion of sales taxes has become commonplace, using ruses similar to those that are alleged to have taken place in this case, and perhaps not just in the art market. The authorities have decided to make a high-profile example of Mr Kozlowski 'pour encourager les autres', but are saying that further indictments can be expected.


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